The CIO’s guide to blockchain technology

It’s the distributed ledger technology gaining traction in firms across a range of industries, but many CIOs are still assessing how best to deploy blockchains.

Blockchain tech might have sprung to prominence as the mechanism underpinning digital currency bitcoin, but it’s very much on trial in many companies. Here’s what you need to know to make an informed decision.

What is it?

Blockchain sequences allow digital transaction ledgers to be created and shared among a distributed network. The reason it’s so attractive to many businesses is that the blocks of data that form the ledger can be accessed and altered by different participants without the need for permissions (although many firms are also exploring private, permission-based blockchains). The whole process is encrypted so that each participant can manipulate a blockchain securely.

Transactions are protected because every piece of data ever entered into the blockchain is recorded. When a new transaction is attempted, every node up and down the blockchain will verify it. If enough agree that the transaction matches specific information stored in the blockchain’s records, the new transaction can go ahead and it becomes another block in the chain. It’s then used to authenticate future transactions.

In this way the whole blockchain is used to check and validate new transactions, rather than a single data store. In theory, the more transactions there are, the more detailed the checks.

Where did it come from?

When the person or group known as Satoshi Nakamoto – they remain elusive, despite attempts to track them down – wrote the blueprint for bitcoin in 2008, they described a system that allowed two parties to send payments to each other without the intervention of a third party, such as a bank.

That system would become what we now know as the blockchain. Physical currency was replaced in bitcoin with a digital signature. This signature would form the authenticated link between blocks of data in the chain. Security was maintained by ever-more complex layers of checks.

But while the currency was buffeted by revelations of its popularity on the dark web, the underlying principle didn’t go unnoticed in the technology and financial services industries.

How can it impact business?

Promise and challenge are inherent in blockchain processes. On the one hand, the architecture cuts out the need for a middleman. Financial trades typically take hours or days today, as a clearinghouse checks transactions against its own ledger and collects a cut of the money changing hands.

By giving each bank involved in a blockchain a copy of that central ledger, the need for a clearinghouse would be removed and the process would be cut down to minutes, not hours.

In many respects, blockchain technology is in its infancy outside banking circles. The computational power required to authenticate significant transactions is considerable and expensive. Transparent transactions are well and good, but individual players are anonymised. So proof of concepts and narrow-scope solutions should be the focus for CIOs – for now.

As Simon Taylor, vice-president of blockchain research and development at Barclays, told the BBC, “It’s very early days for this technology but the potential is phenomenal.”